Introduction to Financial Accounting, 3e

1
Long-Lived Depreciable Assets A Closer Look

• Chapter 7

2
Explain the process of depreciating long-lived
assets.
3
Depreciation Slow Expensing of an Asset

• If an asset is one that gets used up in the
  current period it is expensed in the current
  period
• If an asset is one that gets used up over many
  periods it is expensed over many periods

4
Determine depreciation expense using the
straight-line and the double-declining-balance dep
reciation methods.
5
The Effects of Different Depreciation Methods
6
Straight-Line Depreciation
Barlow Paving Corporation purchased a machine on
January 2, 2002, for a total cost of 300,000.
Cost includes Invoice price Applicable
taxes Installation costs Insurance in
transit Shipping costs Personnel training costs
Cost does not include Repairs
Maintenance Insurance (once the asset becomes
productive)
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Straight-Line Depreciation
Data Amount
Cost of machine 300,000 Less Estimated
residual value 25,000 Depreciable
base 275,000 Estimated useful life
5 years
(Cost Residual value) Estimated useful life
(300,000 25,000) 5 55,000 per year
8
Barlow s Financial Statements Using
Straight-Line Depreciation
Partial Balance Sheet December 31, 2004
Plant assets Machine 300,000 Less
Accumulated depreciation 165,000 1
35,000
Book value
9
Double-Declining-Balance Depreciation
Straight-line rate per year 100 5 20
Double-declining balance 2 times the
straight-line rate 40
Book value of machine at the end of the first
year 300,000 40 120,000 300,000
120,000 180,000
10
Describe how the use of different depreciation
methods affects the income statement and
the balance sheet.
11
Straight-Line versusDouble-Declining-Balance
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Straight-Line versusDouble-Declining-Balance
Double-Declining-Balance
Depreciation Net Book Year Expense
Income Value 2002 120,000 23,000 180,000
2003 72,000 25,000 108,000 2004
43,200 53,800 64,800 2005 25,920
71,080 38,880 2006 13,880 83,120
25,000 Total 275,000 210,000
13
Compare and contrast gains and losses
with revenues and expenses.
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Gains and Losses
Gains are increases in equity from peripheral
or incidental transactions of an entity except
those that result from revenues or investments by
owners.
Losses are decreases in equity from peripheral
or incidental transactions of an entity except
those that result from expenses or distributions
to owners.
Revenues Gains Expenses Losses Net Income
15
Calculate gains and losses on the disposal of
depreciable assets.
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Gain on Disposal Example
Barlow sells the machine, which cost 300,000, on
January 7, 2002, for 32,000.
The book value of the machine is 25,000.
What is the gain?
32,000 25,000 7,000
17
Loss on Disposal Example
Assume that Barlow sells the machine for 19,000
on January 2, 2007.
What is the loss?
19,000 25,000 6,000
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Other Depreciation Methods
Units of Production (or Activity) Method
On January 2, 2003, Rodriguez Trucking purchased
a truck for 125,000.
It is estimated that the truck would be used for
400,000 miles.
Estimated residual value is 25,000.
(125,000 25,000) 400,000 .25/mile
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End of Chapter 7